1. Field of the Invention
The present invention relates to a method for providing income for retirees. More specifically, the present invention relates to a method for providing retirement income using mutual fund longevity insurance.
2. Related Art
Presently, many retirees are discovering that they are outliving their retirement savings. This problem (referred to in retirement planning as “superannuation”) is particularly burdensome where retirees are dependent upon defined contribution plans (e.g., 401(k) plans), as opposed to defined benefit plans (e.g., pensions), for retirement income. To avoid the risk of outliving retirement savings, many retirees significantly reduce their standards of living to extend the number of years that retirement savings will be available.
The immediate payout annuity represents a type of retirement planning product that has in the past been used to supplement retirement savings. With an immediate payout annuity, a purchaser liquidates or “rolls over” accumulated assets to make a lump sum annuity purchase. Annuity payments typically commence within one year from the date of payment. For example, if a 65-year-old single male desires to receive a monthly income of $3,000 for life with payments commencing immediately, the lump sum cost of the annuity using current pricing is approximately $430,000.00. However, immediate payout annuities suffer from a number of disadvantages. For example, many individuals are unwilling to relinquish control of large sums of investable assets by rolling over such assets into a single annuity. Further, by rolling assets into a single fixed annuity, the ability to participate in financial markets is eliminated, thereby precluding potential gains that could result had the assets been invested in such markets. Further, immediate annuity purchasers are at the mercy of market conditions at the time of purchase.
Other retirement planning approaches include structured withdrawals that are targeted to match a retiree's life expectancy and periodic fixed-dollar withdrawals that do not detract from principal. However, statistical analysis has projected that structured withdrawals are estimated to fail approximately 50 percent of the time for longer retirements, depending on assumed investment returns and expenses. Further, although periodic fixed-dollar withdrawals fail less frequently than structured withdrawals, failures still occur and it is often difficult for the retiree to properly know how much he or she can spend in the future.
Many individuals assume that they will not reach older ages in retirement, thus obviating the need to provide for retirement income at advanced ages. However, recent longevity statistics show that a large number of retirees will reach ages of 90 or older. For example, a 65-year-old woman has a 40 percent chance of living to age 90, a 20 percent chance of living to age 95, and a 5 percent chance of living to age 100. For married couples where both spouses are 65 years old, at least one of the spouses has a 57 percent chance of living to age 90, a 28 percent chance of living to age 95, and a 7 percent chance of living to age 100. Further, with future advances in medical science, life expectancies will most likely increase. Thus, there is an increasing need to provide retirement income at advanced retirement ages.
Longevity insurance has in the past been proposed as a potential solution for providing retirement income at advanced ages. Longevity insurance is provided in the form of an advanced-life delayed annuity that is adjusted for consumer price inflation. With this approach, the annuity is acquired at a young age and small premiums are paid over a long period of time. Inflation-adjusted income is provided at an advanced age (e.g., ages 80, 85, and 90). However, this approach does not couple the annuity with another product, such as a mutual fund, so that income from the mutual fund and investment gains produced by the mutual fund are automatically invested in the annuity for later use. Moreover, the conventional longevity insurance approach does not provide sufficient flexibility for distribution of assets after the death of the retiree, nor does conventional longevity insurance provide a mechanism for insuring against the early exhaustion of a retirement assets.
Accordingly, what would be desirable, but has not yet been provided, is a method for providing retirement income using mutual fund longevity insurance, wherein income for retirees is guaranteed at advanced ages and the potential is provided to accumulate wealth with equity and/or fixed income mutual funds.